The government's focus on affordable housing, the new procurement policy for state-sponsored projects and a floor price for imports have prompted CLSA to come out with a new report on the Indian steel sector. The international brokerage firm said the sector is 'ripe for rerating', in a research note.
Anti-dumping duties for the next four years will keep the earnings volatility in check according to CLSA. The firm also doesn't expect any serious retaliation from other countries on trade, which will help the companies reduce financial stress and service debt.
The brokerage firm expects the government's focus on affordable housing to push demand growth by 5-7 percent over the next four years. With none of the big steel players looking to expand capacity in the near future, the recent procurement policy which gives preference to domestic steel for state-sponsored projects, will only add to demand, said the brokerage house.
Investment in new steel capacity creation has come to a grinding halt in India in the last three years due to the deteriorating global steel industry environment and the highly leveraged balance sheets of Indian steel companies.CLSA Report
The lack of expansion over the last few years will contribute to a limiting supply in the future, meaning net import of steel will rise to 8 percent of consumption by financial year 2020-21, the report said.
These developments will leave pricing power in the hands of the Indian companies, carving out a premium over imports.
Tata Steel Ltd. and JSW Steel Ltd. are the best positioned among Indian steel manufacturers to take advantage of the positive circumstances, with their “large expansion potential”, the report stated. Here is CLSA's take on the two steel companies.
Tata Steel
- Reiterate 'buy' rating with a Rs 710 target price compared to previous Rs 570.
- New Odisha plant and expansion in Jamshedpur plant will deliver 6 percent volume in FY17-20.
- Supply-demand tightening to higher valuation multiples.
- The possible joint venture between Tata Steel Europe and Thyssenkrupp could de-risk Tata Steel's consolidated balance sheet.
- Outlook for Tata Steel Europe is best in years due to sale of loss-making units, price protection and other tailwinds.
JSW Steel
- Upgraded to ‘buy' with a target price of Rs 300 from the previous price of Rs 185.
- Protection from anti-dumping will give better margin visibility over FY18-20, and a possible margin expansion.
- Expansion of Dolvi plant will lead to an incremental equity value creation.
- Earnings per share have been upgraded to 18 percent CAGR (compounded annual growth rate) for the next three years.
Also Read: Will The Modi Government's Push For Affordable Housing Work?
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